Breaking Down FICO 8

Breaking Down FICO 8

FICO Scores debuted in 1989, but for many people, they remain a mystery – not unlike the truth about Area 51 or the Harry Styles “spitgate” controversy.

Let’s take a deep dive into FICO Score 8, the most popular model, to help you better understand the FICO® credit scoring system and its potential importance in your financial future.

What is a FICO® Score?

The story of the FICO® Score is one of evolution. 

Over the last 33 years, FICO – short for the Fair Isaac Corporation – released many new versions of the FICO Score, a number used to determine your creditworthiness, i.e., your credit score. Over time, they become increasingly popular. 

Yes, it’s a bit confusing that a FICO Score is just another version of your credit score. But it’s best to just go with it.

As of 2022, there are 16 different versions of the FICO Score, with FICO SCORE 8, aka “FICO 8,” being the most popular – especially among businesses. 

According to FICO, 90% of top lenders in the United States rely on its scoring system for 90% of their lending decisions. In other words, it’s pretty important.

What is a FICO Score 8?

The Fair Isaac Corporation released FICO Score 8 in 2009, five years before FICO Score 9 and 11 years before FICO Score 11, two other popular scoring models.

Here are the factors that affect a FICO 8 score:

  • Payment History (35%)
  • Amounts Owed (30%)
  • Length of Credit History (15%)
  • New Credit (10%)
  • Credit Mix (10%)

If you know anything about credit scoring, you’ll immediately recognize the above as they determine any credit score you’ll ever have. They’re the “Fab Five” of credit if you will. 

With these statistics in hand, FICO takes your credit report from one of the three major credit bureaus – Experian, Equifax, and Transunion – and runs it through its algorithm. 

After this, you’ll receive a general FICO Score 8 and possibly industry-specific ones for things like credit cards, mortgages, and car loans.

factors that affect a fico 8 score

What is a Good FICO Score 8?

You must understand the FICO scoring system to judge your credit report accurately.

Here are the basics of the general FICO Score 8 scale:

  • Excellent: 800-850
  • Very Good: 740-799
  • Good: 670-739
  • Fair: 580-669
  • Poor: 300-579

The industry-specific FICO Score 8 range – available for mortgages, car loans, and credit cards – is a bit different:

  • Excellent: 800-900
  • Very Good: 740-799
  • Good: 670-739
  • Fair: 580-669
  • Poor: 250-579

Why Does Your FICO Score 8 Matter?

A strong FICO Score 8 can fuel your financial success, like a great diet and regular exercise fuel your body. 

On the other hand, a terrible FICO Score 8 can roll up the feelings of a hangover, a bad meal, and a breakup all into one. Not an ideal vibe at all.

Here is a breakdown of why having a good credit score is super crucial

  • Applying for a Credit Card
  • Applying for a Loan
  • Renting Housing
  • Signing Up for Utility Services

Why is FICO 8 So Popular?

While the data scientists at the Fair Isaac Corporation understandably work hard on every version of their scoring system, the 8th edition is the most prevalent among businesses.

This is primarily because the system offers a mix of benefits for businesses and customers:

Harsh on High Credit Usage

One reason FICO 8 is so prevalent in the credit world is that its scoring metrics are VERY sensitive to large credit card balances approaching the card’s specified limit. 

To keep your score high, it’s VERY wise to keep your credit utilization below 30%.

Treatment of Infrequent Late Payments

On the other hand, the system is also more lenient on isolated late payments, providing a nice balance for users. For reference, a “late” payment is one more than 30 days past its initial due date.

Multiple Late Payments are Punished

While a one-off missed payment won’t wreck your FICO 8 score, multiple ones may destroy your credit profile.

Businesses like this about FICO 8 compared to the company’s other scoring models because it incentivizes customers to make payments on time consistently.

Small Balance Collections Matter Less

In the world of American credit, a “small balance collection” is less than $100.

Fortunately for everyday people like you and me, FICO Score 8 takes a relatively understanding approach to this type of balance.

Unlike specific credit scoring systems, this version ignores small balance collection actions made against your account.

Limited “Piggybacking” Benefits

“Piggybacking” is the act of adding yourself as an authorized user on someone else’s credit card in order to boost your credit score. As it can be effective in certain cases and is relatively easy, the practice is understandably popular.

After all, who among us doesn’t love a quick fix?

Apparently, FICO Score 8.

The scoring system dramatically diminishes the benefits of piggybacking to your credit score range compared to newer and previous versions. 

To boost your score, you’ll need to address your current credit accounts by improving your payment record and consistently paying down your balance

the lowdown on fico 8

The Lowdown on FICO 8 

FICO Score 8 – aka “FICO 8” is a very popular credit scoring system introduced by the Fair Isaacs Corporation.

Like most alternatives, FICO 8 determines your credit score by judging the “fab five” factors: payment history (35), amount(s) owed (30%), length of credit history (15%), new credit (10%), and credit mix (10%).

From here, your general score will fall in a range of 300-850, with 800-850 signifying an excellent score, 740-799 a very good score, 670-739 a good score, 580-669 a fair score, and 300-579 a poor score. 

It’s essential to keep your FICO Score 8 as high as possible because many businesses view the system as the optimal credit scorer. Your score can affect your ability to apply for a credit card or loan, rent housing, and sign up for utility services. 

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